Indian Banking Sector Reforms: Special Tribunals and Asset Reconstruction Funds

Setting up of special tribunals to speed up the process of recovery of loans and setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount was one of the crucial recommendations of the Narasimham Committee.

To expedite adjudication and recovery of debts due to banks and financial institutions (FIs) at the instance of the Tiwari Committee (1984), appointed by the Reserve Bank of India (RBI), the government enacted the Debt Recovery Tribunal Act, 1993 (DRT). Accordingly, DRTs and Appellate DRTs have been established at different places in the country. The act was amended in January 2000 to tackle some problems with the old act.

DRTs — a compulsion

One of the main factors responsible for mounting non-performing assets (NPAs) in the financial sector has been the inability of banks/FIs to enforce the security held by them on loans gone sour. Prior to the passage of the DRT Act, the only recourse available to banks/FIs to cover their dues from recalcitrant borrowers, when all else failed, was to file a suit in a civil court. The result was that by the late ’80s, banks had a huge portfolio of accounts where cases were pending in civil courts. It was quite common for cases to drag on interminably. In the interim, borrowers, more often than not, stripped their premises of all assets so that that by the time the final verdict came, there was nothing left of the security that had been pledged to the bank.

The Advantage

DRTs, it was felt, would do away with the costly, time-consuming civil court procedures that stymied recovery procedures since they follow a summary procedure that expedites disposal of suits filed by banks/FIs. Following the passage of the Act in August 1993, DRTs were set up at Calcutta, Delhi, Bangalore, Jaipur and Ahmedabad along with an Appellate Tribunal at Mumbai.

However, DRTs soon ran into rough weather. The constitutional validity of the Act itself was questioned. It was only in March 1996, that the Supreme Court modified its earlier order – staying the operation of the Delhi High Court order quashing the constitution of the DRT for Delhi – to allow the setting up of three more DRTs in Chennai, Guwahati and Patna. Subsequently, many more DRTs and ADRTs have been set up.


Unfortunately, as a consequence of the numerous lacunae in the act and the huge backlog of past cases where suits had been filed, DRTs failed to make a significant dent. For instance, the tribunals did not have powers of attachment before judgment, for appointment of receivers or for ordering preservation of property.

Thus, legal infrastructure for the recovery of non-performing loans still does not exist. The functioning of debt recovery tribunals has been hampered considerably by litigation in various high courts. Complains Bank of Baroda’s Kannan: “Of the Rs 45,000-crore worth of gross NPAs, over Rs 12,000 crore is locked up in the courts.” So, the only solution to the problem of high NPAs is ruthless provisioning. Till date, the banking system has provided for about Rs 20,000 crore, which means it is still stuck with net NPAs worth Rs 25,000 crore. Even that is an under estimate as it does not include advances covered by government guarantees, which have turned sticky. Nor does it include allowances for “ever greening”–the practice of extending fresh advances to defaulting corporates so that the prospective defaulter can make interest payments, thus enabling the asset to escape the non-performing loan tag. Warns K.R. Maheshwari, 60, Managing Director, IndusInd Bank: “NPA levels are going to go up for all the banks.” And so will provisions.

Recent Developments

The recent amendment   to the DRT Act addresses many of the lacunae in the original act. It empowers DRTs to attach the property on the borrower filing a complaint of default. It also empowers the presiding officer to execute the decree of the official receiver based on the certificate issued by the DRT. Transfer of cases from one DRT to another has also been made easier. More recently, the Supreme Court has ruled that the DRT Act will take precedence over the Companies Act in the recovery of debt, putting to rest all doubts on that score.

Some More Issues

As things stand, the DRT Act supersedes all acts other than The Sick Industrial Companies Act (SICA). This means that recovery procedures can still be stalled by companies declaring themselves sick under SICA. Once the fact of their sickness has prima facie been accepted by the Board for Industrial and Financial Reconstruction (BIFR), there is nothing a DRT can do till such time as the case is disposed of by the BIFR. This lacuna too must be addressed if DRTs are to live up to their promise.

The amendments would ensure speedy recovery of dues, iron out delays at the DRT end, as well as ensure that promoters do not have the time and opportunity to bleed their companies before they go into winding up.

Yet the number of cases pending before DRTs and courts make a telling commentary on the inability of lenders to make good their threat. They also reflect the ability of borrowers to dodge the lenders.

The main culprit for all this is the law. Existing recovery processes in the country are aimed at recovering lenders’ dues after a company has gone sick and not nipping sickness in the bud. Since sickness is defined in law as the erosion of capital of a company for three consecutive years, there is little to recover from a sick company after it has been referred to the Board of Industrial and Financial Revival (BIFR).

What’s hurting banks now is the fact that these new issues have cropped up even as they have been (unsuccessfully) wrestling with their NPAs which, together, tot up to a staggering Rs 60,000 crore. The stratagem of using Debt Recovery Tribunals has failed. Now these banks have to explore the option of liquidating the assets of defaulting companies (a litigitinous route), or writing off these debts altogether (which may not find favour with shareholders). The solution could lie in better risk management.

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